A Look at Six Small Caps

By Fleming Meeks

LAST WEEK (ticker: SSYS) reported its lowest quarterly revenue in seven years. It was a big come down. After racking up a compounded annual growth rate of 37% from 2000 through the end of last year, the company, which makes 3-D printers and production systems, lost money in the quarter on a 25% decline in revenue. At $9.82, the company’s shares are down on the year—this in the midst of an enormous rally in small cap stocks. Management has backed away from offering earnings guidance for the year, and analysts have slashed ’09 earnings per share estimates by more than half.

Stratasys’s systems turn designs created in computer-aided design systems into prototypes and actual parts and products. (The “printing” is actually a layering of production-grade thermoplastics.) BMW uses the company’s “direct digital manufacturing” systems to produce hand tools used in the company’s manufacturing plants; Diebold uses them to produce parts for its ATMs.

Sales of the company’s low-end printers, which start at around $15,000, were up sharply in the quarter. But the company’s high end systems, which cost hundreds of thousands of dollars, fell off a cliff, as industrial customers laid off engineers and hoarded cash.

Even worse, a big automaker that owns several Stratasys machines, idled the equipment for four months. An overall falloff in use of the machines undermined the company’s razor/razorblade strategy of selling ever-more consumables to an ever-larger customer base. Sales of consumables were off 6%.

That’s the bad news. The good news is that even in the most nightmarish of circumstances—the so-called perfect storm—Stratasys produced $3 million in cash from operations. And the company has a bullet-proof balance sheet, with $47.4 million, or $2.45 a share, in cash and no debt.

Stratasys is the leader in direct digital manufacturing systems, with over 50% of the market; the company also leads the highly fragmented 3-D printer business, with a 10% share. And given its strong staying power, the firm will likely gain even more market share when industrial customers start to spend again. When that time will come is open to debate. Stratasys CEO and co-founder Scott Crump has been an aggressive buyer of the stock over the past several months, snapping up 72,000 shares at prices between $8 and $11.50. Analysts are more downbeat, with price targets as low as $8.

Last year Stratysys earned $13.6 million, or 71 cents a share, on revenue of $125 million. For ’09 the consensus estimate for EPS is 32 cents, rising to 41 cents in 2010.

Based on those numbers, the company is trading at a lofty P/E of 32 times this year’s estimates and 24 times next. But the perfect storm won’t last forever, and when the clouds start to lift, Stratasys’s stock is going to start looking sunny again. Even before that happens, the shares could rise to $12 or more.

WHILE SOLID SMALL CAPS like Stratasys have been left behind in the recent rally, more speculative names, including several recommended by the Barron’s Daily Stock Alert, are up big. Coal miner (PCX) is up 86% since April 27; quick-serve restaurant chain (DENN) is up 54% since April 15; iron ore producer (CLF) is up 89% since March 5; and deep-water driller (HLX) is up 94% since February 5. What all four companies have in common is high debt loads, which investors shunned across the board, but we thought looked manageable in each particular case. If the market is truly on another bull run, these stocks could run a whole lot more as momentum investors pile in. If it isn’t, they could come down hard. Our advice if you bought these stocks: Take your investment off the table and play with the house’s money.

Our advice on (SFD) is easier: Take your bacon off the plate. If you bought the shares of the pork processor after our Alert ran on Monday, sell them now. Smithfield’s shares got butchered by the swine flu scare. We thought it was an overreaction and wrote that the stock, which closed Friday at $8.61, could climb back up to its pre-swine flu level of $11 and change. The shares opened on Monday at $9 and closed yesterday at $12.25. That looks like an overreaction in the opposite direction. If you bought the stock at Monday’s open, you’ve got a two-day gain of 36%. I’m a long-term investor by temperament, but I’ll take a gain like that any time.

Fleming Meeks is executive editor of Barron’s and the founding editor of Barron’s Daily Stock Alert. He previously served as editor of SmartMoney, The Wall Street Journal Magazine, and assistant managing editor of Barron’s. Meeks began his career in journalism 25 years ago as a staff writer for Forbes. He holds a B.A. degree from Windham College.If you have comments or questions, please contact him at fleming.meeks@barrons.com

David Englander is a staff writer for the Barron’s Daily Stock Alert. He joined in 2008 as a reporter. Prior to Barron’s, he worked as a consultant, advising Fortune 500 companies on growth strategies and mergers and acquisitions. He has also worked as an independent equity analyst. Englander holds a B.A. from Amherst College, an M.B.A. from the University of Rochester and an M.F.A. from Columbia University.If you have comments or questions, please contact him at david.englander@barrons.com

Alexander Eule has been a staff writer for Barron’s Daily Stock Alert since 2010 and a reporter for Barrons.com since 2006. Prior to the Stock Alert, Eule wrote the site’s Barron’s Take and Weekday Trader features, offering frequent insights into individual stocks and the broad market. He holds a B.A. from Columbia College and an M.S. in Journalism from Columbia University.If you have comments or questions, please contact him at alexander.eule@barrons.com